Fox News says it can deduct its $787 million settlement with Dominion Voting Systems over false election claims.
Dominion announced April 18 that it reached the settlement with Fox over its promotion of false information about Dominion’s voting machines in the 2020 election.
In a statement, Fox acknowledged “the Court’s rulings finding certain claims about Dominion to be false,” and said the settlement “reflects FOX’s continued commitment to the highest journalistic standards.”
When asked whether the settlement with Dominion would be deducted from the company’s income taxes, Fox Corp. spokesman Brian Nick said in an email to Tax Notes, “I can confirm deductibility.”
Samuel Brunson, a law professor at Loyola University Chicago, said a settlement or even a judgment can be subject to the ordinary and necessary business expense rule for deductibility.
The general rule is that settlements and judgments for defamation committed during trade or business are deductible, Brunson said.
Even though Fox can deduct the settlement, Brunson said, “this isn’t the IRS saying we’re OK with” what Fox did. “Deductions don’t represent the government’s judgment over whether the expense was a good thing,” he said.
Steven Rosenthal of the Urban-Brookings Tax Policy Center agreed that the settlement would likely be deductible under the ordinary and necessary business expense rule.
According to Rosenthal, the standard for those deductions is liberal, though there are “some black-and-white rules for when those deductions will be disallowed.”
Rosenthal said Fox could lose some portion of its deduction if it had an insurance policy that covered part or all of its payment to Dominion. “But we don’t know how much, if at all, actually, that the Fox settlement is insured,” he said.
“What usually bothers people when there’s a big settlement is the settlement payer is trying to get off the hook with respect to both civil liabilities and in some instances criminal liabilities, and people find that offensive. But with the Fox settlement, there was no criminal allegation that can be made by Dominion — they’re not the government,” Rosenthal said.
Ellen McElroy of Eversheds Sutherland (US) LLP told Tax Notes that it is important to note that while the Tax Cuts and Jobs Act changed section 162(f) “to generally disallow deductions for fines or penalties, the disallowance does not apply to any amounts paid or incurred by reason of a court order or agreement in which no government or governmental entity is a party.”
“Although the disallowance under section 162(f)(1) does not apply to such amounts, the underlying provision and regulations can be instructive to taxpayers seeking to substantiate an otherwise deductible settlement amount paid to resolve a dispute between private parties. The statute builds on case law that recognizes that compensatory payments such as restitution and remediation may be deducted,” she said.
Matthew Gardner of the Institute on Taxation and Economic Policy said it makes sense that the settlement would be deductible, but that "the American public has every reason to be mad about the fact that it is.”
“We ought to make a distinction in the tax law between regular and irregular business expenses,” he said, adding that there is nothing regular “about a settlement of this kind.”